Waiting on Congress

It is not often that I feel that I am so directly affected by Congress that I check news updates all day long to see if a vote has been taken. I know that is just a way of life for those who live inside the Beltway, but those of us generally apolitical types living way out on the Left Coast, the actions of Congress, if they are felt at all, are generally sensed in a trickle-down way.

The much-hyped economic stimulus package that has been passed by the House and is under debate (and porkification) in the Senate is one of those rare pieces of legislation that will have a direct impact on us, within hours of its passage. Lost in the hubub about how much cash the government will borrow from our future selves to stuff into our spendthrift hands is an adjustment to the limits on conforming loans. Currently, Fannie Mae and Freddie Mac purchase mortgages up to $417,000 (interestingly, the limit is $625,000 in Hawaii, Alaska and Guam). Because the risk is underwritten by the federal government, the rates on so-called "conforming" loans are substantially lower than non-conforming "jumbo" loans, usually by more than a percentage point. When interest rates are below seven percent, the difference between the two types of loans can amount to an effective spread of fifteen percent or more.

Unfortunately, people who live in many highly populated areas in the US are stuck with higher interest rates due to extraordinarily high property values, even though the standard of living in such places is no better than in other areas whose property values allow for buyers to take advantage of conforming loans. For instance, a perfectly middle class $400,000 home in Ohio would be a two-bedroom fixer-upper on a 6000 square foot lot in Burbank; the equivalent "middle class" class home would be upwards of $900,000. Unless the California family is fortunate enough to have brought a lot of equity to the purchase, or bought long ago, that family must pay higher rates, simply because the non-conforming loan line is neither indexed to location nor adjusted regularly to account for rising (and widespread) property values.

The new legislation under debate in Washington includes a substantial adjustment in the conforming loan line. Information has been hard to come by, as it is drowned out by the debate over the cash distribution. However, according the the text of H.R. 5140, the bill that passed in the House, the jumbo line will now be indexed to local property values, at least for this year. The House bill states that, for loan originated between July 1, 2007 and December 31, 2008, the limitation on the value of a loan that may be purchased by the government agencies will be "125 percent of the area median price for a residence of applicable size," subject to a maximum of what works out to be just over $729,000. There is a lot of play in the language; what is the "area," how is the "median price" determined, and what is "applicable" size? Functionally, however, many areas, the Bay Area and much of Los Angeles included, will shoot straight to the maximum without much need for debate. It could be argued that this kind of indexing to local value is long overdue and easily justified. (See the different standards for Hawaii and Alaska, noted above.)

Happily, we find ourselves right in the crosshairs of this legislation. We have neither sold our house nor bought a new one yet. Had we done so, we would not have been able to take advantage of this new standard. We believe that the increased buying power conferred by the adjustment of the conforming loan line could make it possible for more potential buyers to purchase our house. On our part, the new limit would fit perfectly for us (almost as if it were meant to be), and would provide us with a monthly payment reduced by about twelve percent.

All we need now is for Congress to stop dithering and get on with presenting a complete bill to the President. I am not all that enthusiastic about the cash payment, but the changes to the loan laws can't get here fast enough.